As the turmoil in South Africa’s mining sector continues, the economic toll is
becoming clearer.

With the strikes spreading beyond the natural resources companies, worries over economic paralysis have brought the South African rand to a more than three-year low against the dollar.

Then on Friday, rating agency Standard & Poor’s cut the country’s credit rating by once notch, following rival Moody’s downgrade of the country last month which had marked its first since the end of apartheid.

S&P made it clear that the move was motivated by the strikes affecting the mining companies – and they did not see this as a problem about to go away any time soon, as questions around the ruling party’s plans mount up.

“In our view, the strikes in South Africa’s mining sector will likely feed into the political debate in the run-up to the 2014 elections, which may increase uncertainties related to the African National Congress’ future policy framework,” the agency warned.

What these latest blows to the country’s future prospects underline is the importance of its commodities-related industry – and the wide-ranging implications of the disruption it faces.

The commonly cited figure is that some 75,000 workers in the mining sector have joined strikes, but a new report from Deutsche Bank suggests that figure is, in reality, considerably higher. Its analysts think that more than 90,000 people, or approximately 30pc of the mining workforce, are now on strike.

The damage, as they calculate it, will be significant. The action could result in a loss of at least 2.5pc of South Africa’s gross domestic product (GDP).

As their research notes, South Africa is the world’s fifth largest exporter of thermal coal – used in power stations – and the world’s fourth largest producer of gold. It also produces most – 75pc – of the world’s platinum output, 40pc of the world’s palladium production and 85pc of global rhodium output.

In total, commodities account for around half of its exports. No wonder then that the strikes signal serious risk for its economy.

The deep and dangerous business of platinum was, of course, where the trouble began, and remains the market worst affected by labour strikes.

Anglo American, the world’s top platinum producer, on Friday announced that it had lost $126m (£78m) in revenue due to a month-long illegal strike at its mines. That is just part of a much bigger picture.

South Africa’s strikes have now affected some 28pc of its platinum production or 17pc of global production, according to the Deutsche team.

They believe that production losses have the potential to drive up the price of platinum so that it trades at a premium to gold.

The situation, however, is complicated, since the labour action has spread to the gold sector.

In recent years, the metal’s price has been driven more by macro economic forces and investors’ enthusiasm for a “safe haven” for wealth, than issues around supply.

Deutsche thinks that supply constraints are becoming a more important issue and that this is being highlighted by the situation in South Africa where, they estimate, more than a third of the country’s gold production – 2.5pc of global production – has been hit.

Bulk commodities and the transport infrastructure used to transport them are also being affected.

The prospect of serious upset for the coal industry looks more remote than in the world of precious metals, as its workers tend to enjoy better working conditions and pay. None the less, the possibility of rail and port worker strikes could disrupt the country’s coal and iron ore exports. In fact, Deutsche estimates that the economic cost of the strikes could rise from 2.5pc of South Africa’s GDP to 3pc if the strikes in the transport sector worsen the impact of the mining unrest.

Wet weather and poor yields likely to impact on global food prices

World corn stocks will be tighter than expected well into 2013, while drought has slashed the wheat crop in Australia, the US government reported.

Closer to home, it is wet weather that is causing problems for UK producers. English wine-maker Nyetimber announced last week it had been forced to scrap its entire grape harvest because of the summer’s poor weather.

Meanwhile, the heavy rain means UK wheat yields have fallen to levels not seen since the late 1980s, according to the National Farmers’ Union. Yields have dropped 14pc below the five-year average to just 6.7 tonnes of wheat a hectare, after the wettest summer in England and Wales for100 years.

The damage compounds the impact of the poor crop harvests seen worldwide, most notably in the drought-hit US.

“These UK harvest results will do little to alleviate the global dynamics of commodity prices, with the prospect of relatively high commodity levels through to 2013,” said Guy Gagen, a crops specialist at the NFU.

Brent crude

Oil prices dropped back after the global energy watchdog issued a warning on the strength of global demand.

The International Energy Agency (IEA) revised down its expectations for growth in oil demand over the next five years by some 500,000 barrels per day (bpd) compared to its previous report in December 2011. The IEA now expects oil demand to climb by less than 7pc by 2017, when it will hit 95.7m bpd.

As well as the more subdued forecast for demand, the IEA noted that the power of new technologies used to extract oil from shale rock and other unconventional sources “exceeds earlier expectations”, promising more supply. ER

The Telegraph Investor

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